Bond Report: 30-year Treasury yield posts largest drop in 12 weeks as inflation concerns resurface

Treasury yields slumped on Friday to cap off a five-day skid after inflation rose less than expected, underscoring why some central bankers have voiced concern about the persistence of lackluster inflation in the Federal Reserve’s most recent minutes.

What are Treasury yields doing?

The 2-year Treasury note yield TMUBMUSD02Y, -1.31% sensitive to shifting expectations for central bank policy, fell 2 basis points to 1.489%, helping it to notch a weeklong drop

The 10-year note yield TMUBMUSD10Y, -1.93%  slipped 4 basis points to 2.282%, contributing to a five-day fall of 9 basis points, its largest drop in five weeks.

While, the 30-year bond yield TMUBMUSD30Y, -1.50% shed 4 basis points to 2.822%, also extending the weeklong decline to 9 basis points. This marks the largest drop since July 21. Bond prices move inversely to yields.

What drove markets?

On Friday, the consumer-price index for September, a gauge of inflation, climbed 0.5%, with core prices rising 0.1%. Economists surveyed by MarketWatch were expecting a 0.6% jump, and an 0.2% gain for core prices. With inflation not rising as fast as expected in September, investors said they were concerned that it weakened the case for raising rates in December, or at least slowed the pace of future rate increases.

In addition, the data appeared to dent the Fed’s argument that the past few months of lackluster inflation readings as ephemeral. Several senior Fed officials have said they found it difficult to understand the persistence of tepid price data in the past few months. Bondholders tend to benefit from flagging inflationary pressures as higher consumer prices can erode the value of bond’s fixed-interest payments.

See: U.S. inflation surges again after hurricane boosts gas prices, CPI shows

Expectations for one more rate hike this year only fell slightly. Traders in the fed-futures market are pricing in an 82% change of a quarter-percentage point rate increase at the Dec. 13 policy meeting, from the 87% seen earlier in the week, data from CME Group shows.

What are market participants saying?

“It’s really difficult to interpret this month’s data. People expected that energy prices would have an impact because of the hurricane. But if you look at the CPI excluding food and energy, it didn’t move up. And I think that’s what the Fed is concerned about, why inflation is not rising to its 2% target,” said John Bredemus, a strategist at Allianz Investment Management.

”The minutes reflect a committee divided. The committee seems comfortable coalescing around a robust, while unspectacular, growth forecast but it is the path of inflation which is causing most consternation. They can’t decide if this slow inflation we’re seeing is temporary or not, whether it’s a sign of more slack in the economy and what to do about either of them in terms of policy,” said James Athey, senior investment manager at Aberdeen Standard Investments.

What other economic data were on investors’ radar?

September’s retail sales jumped 1.6%, their biggest gain since 2015. But economists had forecast a 1.9% bump. Hurricanes Harvey and Irma forced Americans to buy new vehicles to replace their damaged cars and trucks.

What did central bankers say?

Outgoing Fed Vice chairman Stanley Fischer said Fed Chairwoman Janet Yellen should serve a second four-year term. “Janet is a safe pair of hands and very good at explaining what she is doing and persuading people of what she’s doing and I think that is critically important,” he said.

Fed Chairwoman Janet Yellen will speak later on Sunday.

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